Short Treasuries & Thoughts On Previous Posting

They're going to drop harder than Milli Vanilli's career. It's not a matter of if, it's a matter of when. The only caveat is if we experience sustained deflation. I doubt this will happen with helicopter Ben at the helm. This article provides the info.

Also, I was wrong a month ago on two counts.

One, I was wrong that oil would fall to $40. It actually fell below that amount.

Two, I was wrong when I wrote that the market rally above 8,000 would be temporary. It seems to be stable for the time, and based on the huge amount of money flowing into Treasuries, it may actually be undervalued despite the CAPE figures. I wonder if CAPE is wrong; that is, if the supply of capital has so increased in the last few decades that the required return on equity has fallen, thus allowing for stable and higher P/E ratios across the board. In this case, a simple mean reversion comparison over the last century would be inaccurate since it would not account for the possibility of a newly higher average P/E.

Ho ho ho!

Undervaluations ahoy!

A cheery article in the FT in anticipation of a year that will be anything but. Here are some good quotes:

"

The most interesting now lie in the corporate bond market. As Mark Kiesel of the bond fund manager Pimco points out, high quality credit spreads are trading at their widest levels for 75 years, while investors this month have been able to put their money into a diversified basket of investment grade corporate bonds yielding 8 per cent compared with an earnings yield on the S&P 500 of 6 per cent or less.

All across the developed world, corporate bond yields appear to be discounting defaults on a scale that defies common sense.

Equities likewise look cheap in big markets in terms of the Q ratio, which measures share prices relative to the replacement cost of net assets, and price earnings multiples. Yet the market will probably have to cope with some spectacular bankruptcies in 2009 and in a more muted capitalist environment the earnings prospect in the developed world looks unexciting.

So while the market will find a floor, any bounce may be tame. The way to make big money in equities will be to identify those companies that will defy the market’s expectation that they will fail."

Also:

"The tank traps next year could be in the government bond markets. With no borrowing taking place in the private sector, governments are being crowded in. Hence low yields on fixed interest debt. When credit markets return to health, this will be very dangerous territory.

If you still feel gloomy, remember that it could be worse. In December 1974 the dividend yield on the FT All-Share index reached 12.7 per cent. Things may be bad, but I don’t think we are going back there."

I don't understand what 'tank traps' are in a financial sense. Nor do I fully understand the meaning/implication of crowding-in. And why that leads to low yields on fixed interest debt (is he talking about treasuries?) and why this will be 'dangerous.'

Jim Cramer's Advice Worse Than A Coin Toss

Hahahah.

Link Here

A sweaty balding man who probably does a dozen rails before the show runs across a room screaming stock tips at the audience, and plays wacky noises to indicate whether a stock should be bought or sold. And millions of people take him seriously. I've always thought it was hilarious (human stupidity tends to be) and I'm glad to see that my thoughts are vindicated.

Commodity Price Outlook

Commodity prices shall return!

The question is, will they begin a consistent upward trend at the beginning, middle, or end of the recovery (once it starts to take hold)? And further, if one wanted to invest in commodities, what would be the best way? Futures contracts? Specific equity indices which are highly correlated with commodity price movements (such as oil companies)?

A question

Suppose in a flash of economic magic, the entire world's population was elevated to the prosperity and standard of living of the average American citizen. Given the earth's limited natural resources, is this level of consumption sustainable in the long term? If not, what can be done about it? After this economic speed bump we are experiencing, which may last anywhere from 1-3 more years (though possibly less) world economic growth will undoubtedly return to its long-term trend of 4-5% per annum. And eventually most of the world WILL be living like the American consumer of today (while the American consumer of today will have an even greater standard of living).

Mark to Market

In an efficient, rational market where asset prices are set according to their likely future inflows discounted to the present at a realistic discount rate, marking to market is a great idea. Having written that, you probably get the jist of what I'm about to say next.

Markets go through periods of terrible inefficiency for indeterminable amounts of time. For example, banks (which rely on positive balance sheet capital to stay solvent) may experience such dramatic, irrational writedowns in the values of their assets (loans for example) that they could potentially be shut down, even though those loans will eventually be paid in full and the primary reason for their dramatic loss of value is irrational fear. In this instance, mark-to-market accounting is a terrible idea and may even cause nasty feedback loops, to the point where what began as an irrational selloff of a financial institution might become rational as other actors lose confidence and stop transacting with the institution. When that happens, the company is doomed, unless uncle Hank steps in with billions of dollars in bailout cash.

[example of S&L bailout and eventual loan repayment]